Brexit

Overview

On 23 June 2016, the British electorate voted by a margin of 52%-48% to leave the European Union. Following this, the Prime Minister triggered Article 50 of the Treaty of Lisbon on 29 March 2017, meaning that the UK will leave the EU by 29 March 2019 unless there is unanimous agreement from Member States to extend this period.

AIMA is actively engaging with policymakers, regulators and other industry bodies to ensure that the voice of the alternative investment management industry is heard at every stage of the Brexit process. AIMA has established a Brexit Task Force consisting of fund manager and sponsoring partner service provider members to help guide our Brexit policy work.

In addition to undertaking a Brexit Survey mapping the exposures of members globally, the Brexit Task Force published a position paper in December 2016 intended for UK politicians and regulatory authorities that sets out our priorities for Brexit and the value of the industry to the UK. We also propose a future UK/EU relationship based on equivalence, non-discrimination and reciprocity. In May 2017 AIMA published a detailed breakdown of the respsective EU and UK institutional negotiating positions for Brexit, as well as a paper on the Brexit related tax concerns and opportunities for hedge fund managers.

Legal Process

Article 50 of the Lisbon Treaty defines the process by which a Member State can leave the EU, requiring a formal notification to be made by that Member State to the European Council of its desire to leave. This involves a two-year period during which a withdrawal agreement is to be negotiated and concluded by the UK and European Council acting by qualified majority, with the consent of the European Parliament. Upon the entry into force of the withdrawal agreement or, failing that, the expiry of the two year period, the EU Treaties will cease to apply to the UK unless an extension is agreed unanimously by the European Council.

Future relationship between the UK and EU

The UK has accepted that it is unrealistic for the EU to permit full Single Market access for the UK whilst the UK does not accept all four freedoms, most importantly the free movement of persons which the UK government has confirmed will end when the UK formally leaves the EU. The UK has also set out its intention to leave the Single Market and the Customs Union in order to be able to sign bilateral free-trade agreements with other countries post-Brexit. Despite leaving the EU, the UK government has confirmed its intention to maintain a close partnership with the EU and to remove trading frictions to as great a degree as possible. However, it is still too early to tell the precise form or shape of this future agreement. The EU is currently united in refusing to discuss the future trading relationship until fundamental matters, namely the UK Brexit financial settlement, are agreed.

The latest documents on the EU/UK negotiations can be found on the European Commission's website - here.

Implications for the hedge fund industry

There will be various direct and indirect consequences of Brexit for the alternative asset management industry, posing both risks and opportunities. Unanswered questions include:

the future of delegation arrangements between the EU and third-countries, and possible location policies for central clearing of Euro denominiated derivative contracts;

the willingness of the UK legislators and regulators to place asset management at the front of their thinking as a UK growth industry post-Brexit;

the willingness of the EU to grant equivalence to the UK as a third-country under various pieces of EU financial services legislation;

the future policy direction of existing and future EU financial services legislation, in particular the maintenance of private placement regimes under AIFMD and the Capital Markets Union project; and

the degree of access in the UK to skilled employees from the EU and beyond.

From the perspective of the hedge fund industry, greater legislative sovereignty for the UK government and regulatory authorities upon leaving the EU provides an opportunity for the UK to tailor its domestic fund management rules to improve their proportionality and global competitiveness, potentially by aligning them more closely with those of other international financial services centres such as the US, Hong Kong and Singapore. However, this coincides with the loss of influence over the rules applied to a significant market of potential investors.

Contact

If you have any questions in relation to AIMA’s Brexit work, please contact Oliver Robinson (orobinson@aima.org).